Texas County & District Retirement System (TCDRS) is an agent multiple-employer system, which is an aggregation of 574 single employer plans, with pooled administrative and investment functions. For each employer, a separate account is maintained to assure that its contributions are used exclusively for the benefit of its employees. Since an actuarial valuation is performed for each employer, the potential impact of this bill will vary by employer.

ACTUARIAL EFFECTS:

According to the actuarial analysis, HB 407 would have only a very small financial or actuarial impact on the TCDRS system as a whole and on its individual employers. TCDRS, as a whole, and each of its individual employer plans are currently funded on an actuarially sound basis, as defined by the Texas Pension Review Board. Adoption of this legislation will not impact that status.

SYNOPSIS OF PROVISIONS:

HB 407, to be effective January 1, 2010, except Section 841.0091, Government Code, as added by this act, and Sections 845.314 and 845.315, Government Code, as amended by this act, take effect September 1, 2009, would provide the following changes:

·         Requires that all participating subdivisions adopt a variable rate funding arrangement, except for those exempted under Section 844.601

·         Adds Section 844.601 to the TCDRS code. This provision would exempt any counties that have not adopted a variable rate funding agreement from doing so, so long as the counties contribute toward their unfunded obligations over an amortization period no greater than the period used by other TCDRS employers.

·         Allows the board of trustees the ability to elect for differing rates of interest to be credited to the optional group term life fund, the employee saving fund, and the current service annuity retirement fund for periods specified by the board.

·         Requires that all employers who adopt variable rate funding have a maximum vesting period of 10 years and adopt rule of 80 eligibility.

·         Allows for the board of trustees to adopt a mortality table to be used in determining actuarial equivalents.

·         Allows for an ex-spouse under a qualified domestic relations order to have annuity options independent of the election by the member.

·         Would require all employers to adopt a provision that allows for vested members to receive service credit for prior military service that they are not eligible for under the Uniformed Services Employment and Re-employment Rights Act of 1994 (USERRA).

·         Would allow for TCDRS members to count service for refunded accounts under proportionate retirement systems toward retirement eligibility.

FINDINGS AND CONCLUSIONS:

This bill would amend the Texas County & District Retirement System (TCDRS) Act to allow a number of changes relating to the funding, eligibility and benefits of the System. Several changes are also related to the administration of the System and clarification of the law.

Note that benefits in this system are actuarially reduced for earlier retirement ages, so that allowing members additional service credits only for the purpose of eligibility would generally have only a minimal actuarial impact.

HB 407 would require all districts to adopt a variable rate funding agreement, where the required contribution varies from year to year. Currently, 97% of TCDRS employers have adopted this method.  Under this approach, the employer contributes the same percentage of pay each year, unless the actuary deems the fixed rate insufficient to pay off the employer’s unfunded actuarial accrued liability over a period of no more than 30 years.

This change is not expected to have a material impact on the overall funding of TCDRS, but it does have the potential to impact the minimum required contribution rate of 14 participating districts.  For these districts, the calculated contribution is expected to decrease, though they could continue their current contribution rate. Note that this is based on the December 31, 2007 valuation and does not take into account the impact of potential negative asset performance after that date, which could potentially result in increased contributions. 

Under HB 407, any employer adopting a variable funding rate must also adopt a maximum vesting period of 10 years.  This change would require three employers to switch from 12 year vesting to 10 year vesting (or less).  In addition these employers would have to adopt rule of 80 retirement eligibility.   Although the switch from 12 year vesting to 10 year vesting and the rule of 80 would tend to increase the required contribution rate, it would be offset by the expected decrease due to variable rate funding being less than fixed rate funding.  Therefore this change would have some impact on the liabilities and contribution rates of the affected counties, but virtually no impact on the overall funding of TCDRS.

The bill would create a provision for any counties who have not adopted variable rate funding to continue their fixed rate funding.  There is only one county that would be affected by this provision.  This county would be required to contribute toward its unfunded obligations over an amortization period no greater than the period used by other TCDRS employers. Effective for the December 31, 2008 valuation, that period is 20 years. The amortization period for the county based on the December 31, 2007 valuation is 9.2 years.

Under the current language, TCDRS is required to apply a specific rate based on each employers January 1^st account balance.  The revised language would allow the Board of Trustees flexibility in adopting rules to allocate investment earnings or losses. There is no direct actuarial impact unless a revised allocation method is adopted.  If this does occur, the impact will be neutral to the system as a whole, and the effect for an individual employer will be dependent on the actual investment returns and the employer’s characteristics.

Currently, TCDRS uses the UP-1984 mortality table for it’s calculation of actuarial experience.  HB 407 would allow for the board of trustees to adopt a new mortality table based on the recommendation of the system’s actuary.  This would have no actuarial impact on TCDRS as it would make no change to the current mortality table, but it would allow for a change in the future.

The bill would allow for an ex-spouse under a qualified domestic order to have annuity options independent of the election of the member.  Currently, an ex-spouse must wait until a member retires then receive the benefit in the same form of payment.  Cost or savings from this new approach is not expected to be material.

HB 407 would adopt a provision which would allow vested members to receive service credit for prior military service which they are not eligible for under the Uniformed Services Employment and Re-employment Rights Act of 1994 (USERRA).  This provision is currently in law on an optional basis; but HB 407 would make it mandatory.  Currently 70% of all TCDRS employers have adopted this provision, including all but two counties.  Since the additional service would only impact eligibility and not benefit amounts, the impact of this change is expected to be immaterial.

Currently, TCDRS members can only count service with another proportionate retirement system that is attributable to an active account.  The proposed change would allow for members to also count service for refunded accounts from proportionate systems.  Service credit from proportionate retirement systems can only be counted toward eligibility purposes.  Because the change only impacts eligibility and not benefit amounts, the effect is expected to be immaterial.

TCDRS, as a whole, and each of its individual employer plans are currently funded on an actuarially sound basis, as defined by the Texas Pension Review Board. Adoption of this legislation will not impact that status.

METHODOLOGY AND STANDARDS:

The analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the December 31, 2007 actuarial valuation of TCDRS. No adjustments were made for actual market returns in 2008. The analysis assumes no further changes are made to TCDRS and cautions that the combined economic impact of several proposals can exceed the effect of each proposal considered individually. According to the PRB actuary, the actuarial assumptions, methods and procedures appear to be reasonable.  All actuarial projections have a degree of uncertainty because they are based on the probability of occurrence of future contingent events.  Accordingly, actual results will be different from the results contained in the analysis to the extent actual future experience varies from the experience implied by the assumptions.

SOURCES:  

Actuarial Analysis by Mark C. Olleman, Actuary, and Nick J. Collier, Actuary, Milliman and Associates, March 10th, 2009

Actuarial Review by Mr. Martin McCaulay, Deputy Executive Director/Actuary, Pension Review Board., March 23, 2009

GLOSSARY OF ACTUARIAL TERMS:

Normal Cost-- the current cost as a percentage of payroll that is necessary to pre-fund pension benefits adequately during the course of an employee's career.

Unfunded Liability-- the amount of total liabilities that are not covered by the total assets of a retirement system.  Both liabilities and assets are measured on an actuarial basis using certain assumptions including average annual salary increases, the investment return of the retirement fund, and the demographics of retirement system members.

Amortization Period-- the number of years required to pay-off the unfunded liability.  Public retirement systems have found that amortization periods ranging from 20 to 40 years are acceptable.  State law prohibits changes in TRS, ERS, or JRS II benefits or state contribution rates if the result is an amortization period exceeding 30.9 years.